German Bunds Drop as Greek Election Damps Euro-Breakup Concern

June 18 (Bloomberg) -- German bonds declined after official
projections showed pro-bailout parties won enough seats to
control Greece’s parliament, damping demand for the securities
as a refuge from Europe’s debt crisis.

The drop pushed up the yield on the securities to the
highest in five weeks. Following yesterday’s election, European
governments signaled a willingness to ease the austerity
measures demanded of Greece as part of its international aid
agreement, damping concern that it would be forced from the
currency bloc. World leaders meeting in Mexico will agree to
boost the $430 billion firewall the International Monetary Fund
announced in April, host President Felipe Calderon said.

“I expect the initial reaction to be a relief rally in
risk assets such as stocks and peripheral bonds, and some
selloff in haven assets, especially German bonds,” Mohit Kumar,
head of European interest-rate strategy at Deutsche Bank AG in
London, said in a telephone interview after exit polls were
released yesterday.

German 10-year yields rose nine basis points, or 0.09
percentage point, to 1.52 percent at 7:15 a.m. London time, and
reached 1.55 percent, the highest since May 10. The 1.75 percent
security due in July 2022 fell 0.82, or 8.20 euros per 1,000-euro ($1,272) face amount to 102.085.

The pro-bailout New Democracy and Pasok parties won enough
seats to form a majority in the 300-member Greek parliament,
according to an official projection.

Deeper Crisis

German bonds rallied in the aftermath of an inconclusive
Greek election on May 6, driving yields of all maturities to
all-time lows, as investors sought the safest assets amid
speculation the Mediterranean nation may leave the 17-nation
euro area.

The crisis deepened further on June 9 as Spain asked for a
100 billion-euro bailout for its beleaguered banks, driving
yields on the nation’s 10-year securities to the highest since
the start of the euro in 1999. Spain also saw its credit rating
cut three levels last week by Moody’s Investors Service to Baa3,
or the lowest investment grade.

Italian bond yields climbed to the most since January amid
concern the debt crisis will spread to the currency bloc’s
third-largest economy.

“There has been a strong risk-off move since the last
Greek elections and the subsequent failure to form a majority
coalition as fears of a Greek exit have grown,” Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in
London, said before the election. “In addition Spain has been
forced to seek a bailout of its banks as speculation about their
solvency has grown, pushing its yields higher.”

Record Yields

The average rate on bonds issued by the Group of Seven
nations fell to as low as 1.12 percent this month, the least
since the euro’s creation in 1999, Bank of America Merrill Lynch
index data show.

Yields on government securities in the U.S., the U.K.,
Austria, Belgium, the Netherlands, Finland, France and Australia
tumbled to all-time lows this month as Europe’s debt crisis
intensified, manufacturing worldwide slowed and U.S.
unemployment rose.

Spain’s 10-year yields climbed to 6.998 percent on June 14,
from this year’s low of 4.83 percent reached on March 1.
Similar-maturity Italian debt yields climbed to 6.34 percent
last week, the highest since Jan. 20 and compared to this year’s
low of 4.68 percent on March 9.

The extra yield investors demand to hold benchmark Spanish
securities instead of German bunds expanded to 554 basis points
on June 15, the most in the history of the euro. Italy’s 10-year
yield spread over bunds increased to as much as 490 basis points
on June 12 from as low as 276 basis points on March 16.

Debt Restructuring

Greece completed the largest debt restructuring in history
in March, as bondholders forgave more than 100 billion euros on
their government investments.

Since then, Greek bonds issued under the terms of the deal
have slumped. The price of the 2 percent security due in
February 2023 was at 16.42 percent of face value on June 15,
down from 27.83 percent on March 12.

The bonds yielded 27.13 percent, compared with a rate of
less than 17 percent on Greece’s 10-year bonds on June 17, 2011.

Of Greece’s 266 billion euros of debt, about 194 billion
euros, or 73 percent, is held by the European Central Bank,
euro-area governments and the International Monetary Fund,
according to the Greek debt management Office in Athens. In
2010, before the first bailout, Greece owed about 310 billion
euros, all to the private sector.

Greek Restructuring

The restructuring agreement was part of Greece’s second aid
request from European institutions, adding to a bailout granted
in 2010. Ireland and Portugal have also received aid.

In the May 6 election, pro-bailout New Democracy won the
largest share of the vote, with Pasok, the Socialist party,
trailing in third place. Syriza, the anti-bailout party, came
second.

Policy makers are taking action amid the steepest global
slowdown since 2009. Australia’s central bank cut interest rates
on June 5, and Bank of England Governor Mervyn King announced
joint steps with the U.K. Treasury to increase the flow of
credit on June 14.

ECB President Mario Draghi left the door open for a rate
cut at a June 6 press conference, while highlighting the
limitations of the ECB’s tools in countering the region’s
financial turmoil.

German bunds handed investors a return of 3.1 percent this
year, according to indexes compiled by Bloomberg and the
European Federation of Financial Analysts Societies. Italian
bonds have gained 6.9 percent and Spanish debt has lost 6
percent, the indexes show.

Since the last day of trading before the first election on
May 6, German securities have gained 1.3 percent, while Spanish
bonds have declined 5.4 percent and Italian securities have
dropped 3 percent.